Budget: Household Impact
Lord Vinson Excerpts(8 years, 7 months ago)
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Lord O’Neill of Gatley
My Lords, the distributional analysis subsequently published on the government website, as I just outlined, actually shows that if one needed to specifically pick where the impact was felt most severely across the different quintiles of income distribution, it was in the highest 20%.
Lord Vinson (Con)
My Lords, when addressing this Question, could the Minister bring to the attention of the House that, according to Treasury figures on 21 July, the debt-servicing costs of our huge borrowings is £1,841 per household? Is it surprising that people feel hard up? That money must come out through tax, VAT and other directions somewhere. Individually per household, that is what is being paid.
Lord O’Neill of Gatley
My Lords, I cannot recollect the exact numbers but those suggested by my noble friend sound broadly accurate. It is right to refer to such parameters. Indeed, the approach towards the now preferred way of presenting the distributional analysis is predicated on taking account of the consequences of the amount of public debt and, implicitly with that, the appropriate desire of the Government to reduce that level of debt.
Economy: Public Finances
Lord Vinson Excerpts(9 years, 1 month ago)
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Lord Vinson
To ask Her Majesty’s Government, further to the Written Answer by Lord Deighton on 13 February (HL 4675), what plans they have to reduce the deficit and to make the public more aware of the effect on living standards of the United Kingdom’s debt servicing costs, which are currently £766 per annum per person or £1,841 per household.
Lord Newby (LD)
My Lords, the Office for Budget Responsibility forecasts that this year the Government will cut the deficit in half as a percentage of GDP from its post-war peak in 2009-10. It is forecast to fall every following year, reaching a surplus in 2018-19. The Government set out in the Budget document that reducing debt as a share of GDP will help to control debt interest and reduce the burden of these costs on future generations.
Lord Vinson (Con)
I thank the Minister for his very sagacious reply. Does he agree that, if the public were more aware of our huge national indebtedness, they would be more receptive to the need to put it right? So when he is a Minister in the next Government, will he ensure that every effort is made to encourage the nation to save more, export more, import less and reduce subsidies generally, not least the £14 billion a year net that we give to the European Union, which should be treated as overseas aid?
Lord Newby
My Lords, I thank the noble Lord for his optimism about my future career prospects. I agree with what he says about savings in particular. That is why the Chancellor announced at the Budget a new personal savings allowance of up to £1,000 for basic rate taxpayers, more flexibility in the operation of ISAs and a new Help to Buy ISA for first-time homebuyers.
Finance: Interest Rates
Lord Vinson Excerpts(10 years, 1 month ago)
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Lord Newby
My Lords, interest rates are set by the Monetary Policy Committee. The noble Lord quoted rather selectively from the Act. If he had read Section 19(1) instead of Section 19(2), he would have found that the Treasury’s powers to which he referred are applicable only if they are,
“required in the public interest and by extreme economic circumstances”.
In the absence of “extreme economic circumstances”, the Treasury has no reserve powers.
Lord Vinson (Con)
My Lords, whoever is in charge, is it not time we had a monetary policy system that paid due regard to the rate of exchange? A trading nation cannot ignore the rate at which it exchanges its goods. Is it not time our policy embraced the effect of interest rates on the rate of exchange as well as on inflation?
EU: UK Contribution
Lord Vinson Excerpts(10 years, 6 months ago)
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Lord Vinson
To ask Her Majesty’s Government what action they are taking to raise public awareness of the United Kingdom’s net contribution to the European Union’s budget over the last six years exceeding £53 billion, as set out in the HM Treasury Pink Book 2013, and the effect that has on the United Kingdom’s public sector borrowing requirement.
Lord Newby (LD)
My Lords, to ensure transparency and increase public awareness, HM Treasury publishes details of UK contributions to the EU in its European Union finances and public expenditure statistical analyses publications. The previous Government gave up a significant portion of our abatement, and consequently our net contributions were always likely to increase. Following the real-terms cut to the 2014 to 2020 payment ceilings negotiated by the Prime Minister in February, they will now be going up by less.
Lord Vinson (Con)
My Lords, I thank the Minister for his considered reply. Perhaps I may illustrate my point. Recently, the Chancellor returned from China, pleased that he had raised £13 billion to build the new nuclear power station so desperately needed for our energy security. Is it not paradoxical that over the past six years our net contribution to the EU, which is substantially used for infrastructure, has been over £50 billion? That is enough to build at least three nuclear power stations. How is it that we can find the money to build other people’s infrastructure but not our own?
Lord Newby
My Lords, by looking at the net contribution to the EU, the noble Lord is concentrating on only one dimension of our relationship with the Union. He is ignoring the very substantial economic benefits that we enjoy through increased internal trade via the single market, increased external trade via, for example, the recently concluded EU-Canada trade agreement, and increased investment in the UK by companies such as Nissan. He is also ignoring the non-economic benefits of membership in the fields of the environment, justice and external affairs.
Bank of England: Monetary Policy Committee
Lord Vinson Excerpts(10 years, 9 months ago)
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Lord Newby
My Lords, the American experience demonstrates how tricky it is for central banks to give forward-looking guidance without it having an effect on the market. However, as the MPC said at its meeting just last week, it viewed the implied rise in the expected future bank rate as not warranted by recent developments in the domestic economy. It is trying to be cautious and reduce any potential volatility.
Lord Vinson
My Lords, the world’s biggest gilt brokers, PIMCO, wrote about four weeks ago, as reported in the Financial Times, that the new Governor of the Bank of England would have only one shot in his locker, and that is to let the pound depreciate. Is it such a bad thing if, after 30 years, a trading nation begins to consider the rate at which it trades with the rest of the world? Is not our failure to look at the rate of our exchange in the past one of the reasons why we have such a high imbalance of trade?
Lord Newby
My Lords, the pound has fallen in value against other international currencies by about 20% in recent years and that has not automatically had a vast impact on the balance of payments. There are considerable signs of optimism about that. For example, exports in goods to the EU increased by almost 7% last month. However, I think that recent experience has shown that devaluation on its own does not cut the mustard—we also need to have a whole raft of supply-side measures in place. That is why things ranging from the additional resources to UKTI, at one end, to bringing more money into science and apprenticeships, at the other, are necessary if we are to have a significant improvement in the balance of payments.
Economy: Fiscal Framework
Lord Vinson Excerpts(10 years, 11 months ago)
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Lord Newby
My Lords, I know that the noble Lord is a great reader of IMF reports and that he will, therefore, have read the following from its recent report:
“The commitment to a medium-term plan has earned the government credibility … While adhering to the medium-term framework, the government has shown welcome flexibility in its fiscal program”.
We agree.
Lord Vinson
My Lords, does the Minister agree that this country currently has to borrow over £50 billion a year to meet its obligations, largely due to our inability to export? That £50 billion comes after selling some of our prime assets like our water companies and utilities which, for some reason, pension funds abroad think better of investing in than our own pension funds do. Leaving that aside, we have a floating pound and the only way that we can actually make ourselves more competitive is to let the pound float down. I hope that the Government and the new governor will encourage this.
Lord Newby
My Lords, as the noble Lord said, we have a floating exchange rate. The Government do not set a target for the exchange rate; it responds to economic circumstances, including the decisions taken by the independent Bank of England.
EU: Budget Report
Lord Vinson Excerpts(11 years ago)
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Lord Hollick
My Lords, I want to discuss the political and policy judgments that have been made since the financial crisis. The previous Chancellor, my right honourable friend Alistair Darling, like everyone else, did not see the 2007-08 banking crisis coming, nor the damage that it would do to our public finances, but in the eye of the financial storm, he did an excellent job of judging what needed to be done. He organised the huge recapitalisation of the banks. He sought to find the most effective balance between policies to repair the public finances and reduce public debt and also to promote growth. He recognised that the UK’s ability to finance its ballooning deficit would require the support of the bond markets, which would need to be convinced that the Government were prepared to take the tough and correct measures to achieve those joint objectives. He rightly anticipated that external events might call for additional rebalancing of the policy mix, over and above the deployment of automatic stabilisers. His was a pragmatic and thoughtful response to an unprecedented crisis, and it commanded broad support at home and abroad.
What happened next? One of the present Chancellor’s first and very important decisions on coming into office was to ratchet up the austerity targets and to shun the flexible, carefully nuanced approach of his predecessor and instead opt to wear a very tight financial straitjacket. That approach, which we now know as plan A, was given intellectual credibility by a report from US economists Rogoff and Reinhard, which Osborne cited in a speech as,
“Perhaps the most significant contribution to our understanding of the origins of the financial crisis”.
Buoyed by that report and the plaudits from the hedge funds and bond investors in the City and, crucially, strong backing from the IMF, the Chancellor believed that he had struck exactly the right policy balance between austerity and growth which would lead to the elimination of the structural deficit by 2014-15. Crucial to that judgment was the forecast of strengthening economic growth over that period.
As we have heard from all sides of the House today, that has not come to pass. Indeed, recent employment, bank lending, government borrowing and GDP numbers all confirm that the economy is flatlining. The UK is now the worst performing major economy. As the UK’s performance has weakened, as each forecast is missed and as austerity measures are tightened and extended, confidence—an ingredient vital to economic growth— has evaporated. Domestic consumer spending is depressed, export performance has fallen well short of forecast and companies continue to defer investment projects. Rating agencies downgrade the UK, citing a weaker economic and fiscal outlook and, specifically, the lack of growth.
The high priest of the international bond market, a group that I am sure is high on the Chancellor’s Christmas card list, Bill Gross of PIMCO, the world’s largest bond investor, declared last week that,
“the UK … have erred in terms of believing that … fiscal austerity … is the way to produce real growth. It is not. You’ve got to spend money. Bond investors want growth”.
The intellectual prop of Rogoff and Reinhard turns out to be a shoddy piece of research from the “garbage in, garbage out” school of analysis, with the corrected model—
Lord Vinson
Before the noble Lord sits down, he is leading up to a rather important figure. Earlier in his most interesting speech he recognised that Darling had the problem of a ballooning deficit of borrowing. Everything that he is saying now would increase the deficit of borrowing. Would he like to give us the sort of figure that he would like to see that borrowing figure go up to?
Lord Hollick
I am coming to that.
The intellectual prop of Rogoff and Reinhard turns out to be a shoddy piece of research because the corrected model shows that highly indebted economies can grow at 2% or more. Perhaps the unkindest cut of all, though, is the IMF’s verdict that plan A is not working. In the light of the weakening economy, it is urging the Chancellor to show greater flexibility and adopt measures that will help the economy to grow. The Chancellor has sought to rubbish this assessment by asserting that the IMF is itself not united in that view. However, my own inquiries suggest that this is not the case and that the damning criticism of the Chancellor’s stewardship is a widely held view within the IMF.
The forthcoming Article IV assessment of the UK economy by the IMF will provide a detailed analysis of the economy and recommendations for policy changes. It will be interesting to see whether the Chancellor chooses to fight the IMF every inch of the way, which may be his instinct, or whether he will see it as an opportunity to recognise that his experiment has failed and that new measures are needed.
As it happens, the IMF assessment coincides with the arrival of Mark Carney, the new Governor of the Bank of England, who last week described the UK as a crisis economy. Billed as an advocate of a more activist monetary policy whose monetary bazooka, according to one recent Treasury briefing, will leave us knee-deep in newly printed money, Mr Carney in recent weeks has begun to row back hard from the far reaches of monetary adventurism. He has made it crystal clear that Governments should not be looking to central banks to return countries to prosperity. Mark Carney will also have noted that his predecessor, who has one vote on the committee, has failed to persuade the MPC in recent months to increase quantitative easing.
I have suggested before that we should not be surprised if, as part of the extended negotiations to secure Mr Carney’s services for the next five years, the Chancellor privately acknowledged the need for more supply-side reforms and fiscal measures to stimulate demand to help to promote growth. The coincidence of the IMF assessment and the new governor’s arrival could just provide the opportunity for the Chancellor to alter course. To do that, though, the Chancellor and the Prime Minister would have to move off their favourite mantra that you cannot borrow your way out of debt. In one sense, that particular fox has already been shot, as the automatic stabilisers have allowed increased borrowing to fill in the financing hole left by no growth. The Chancellor now needs to take that lesson one step further and introduce fiscal measures such as lower NIC and measures to promote investment in infrastructure and new housing stock. Borrowing to invest to promote growth will pay back in increased economic activity, greater confidence and rising tax receipts.
The Government need to stop the endless tinkering with banking rules on capital, funding and liquidity. Alistair Darling bequeathed the coalition a well funded banking sector, with bank shares trading above the levels where the Government had invested. On assuming office, the coalition began reworking the banking rules, a project that continues to this day. Since the start of this Government, bank lending to non-financial businesses has fallen by an unprecedented 19%. This collapse in bank lending will not be reversed until and unless the Government allow them to get on about their real business, which is to provide credit to finance growth.
Will the Chancellor heed the advice of the IMF, the bond markets and business and acknowledge that the public finances can be repaired only if meaningful growth can be achieved and sustained? Waiting for something to turn up is the wrong policy choice. Business, hard-pressed citizens and many on his own Benches will be hoping that he has the political courage to do so. Rather than wasting his time on ludicrous Enron-like efforts to massage the deficit numbers and issuing endless press releases on growth projects that never see the light of day, the Chancellor should deploy his intellect, his energy and his ingenuity in devising and implementing growth policies that will get Britain moving forward again.
Lord Vinson
Perhaps the noble Lord could attempt to answer my question. He would give his whole contribution much more cogency if he could come up with a figure for the sort of level that he would like to see the Chancellor increase his borrowing to.
Lord Hollick
I am not talking about figures; I am talking about the importance of using the public finances to invest in growth. That is what we need. Without growth, we simply will not be able to repair the public finances.
Bank of England: Monetary Policy
Lord Vinson Excerpts(11 years, 1 month ago)
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Lord Newby
My Lords, the Government’s view is that it is in the long-term interests of everybody, including pensioners and families, that we deal with the deficit and get growth going on a sustainable basis. In the short term, the Bank has taken the view that to keep within the inflation target and, subject to that, to support the economic policy of the Government, including their objectives for growth and employment, it should keep interest rates low.
Lord Vinson
My Lords, does the noble Lord agree that many people increasingly feel that the brief given to the American Fed, which is rather wider than the brief given to our Monetary Policy Committee, would be advantageous? Instead of looking solely at inflation, it would enable the Monetary Policy Committee to examine the effect of high interest rates on the rate of exchange. The pound has been kept higher than its purchasing power parity for years and, as a result, we have a huge trading deficit. A trading nation really ought to look seriously at its rate of exchange, which ought to be one of the factors that a new remit should cover.
EU: UK Net Contributions
Lord Vinson Excerpts(11 years, 6 months ago)
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Lord Vinson
To ask Her Majesty’s Government how the rise in the UK’s net annual contributions to the EU budget to over £10 billion per annum (as set out in the Pink Book 2012) relates to public sector cuts in other areas.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the UK’s net contributions to the European Union have indeed increased over recent years. This is mainly the result of unacceptable increases in the annual EU budget and to changes to the calculation of the UK abatement, agreed by the previous Administration. This Government’s top priority is budgetary restraint, thereby ensuring that the EU budget contributes to domestic fiscal consolidation.
Lord Vinson
I thank the Minister for his considered reply. Does he appreciate that while we practise austerity here in the UK, our net contribution to the EU has doubled since 2006 to over £10 billion a year? The UK has to borrow every penny of it from others, thus increasing our national indebtedness. As our Government were outvoted in their attempt to reduce the 2013 budget, will the Minister strive to get a better deal in the forthcoming negotiations, not least by withholding our £5 billion a year contribution to the structural funds? If invested here in our infrastructure, it would help to create over 250,000 badly-needed jobs.
Lord Sassoon
My Lords, as the House is aware, we are coming up to the negotiations of the multi-year financial perspective. That agreement requires unanimity of member states. My right honourable friend the Prime Minister has made it clear in a statement, jointly with other European colleagues, that the maximum acceptable expenditure increase through that period is a real freeze in payments. That continues to be the Government’s position. As for structural funds, we cannot just opt out of any particular area of EU expenditure, although I agree that in the area of structural and cohesion funds, it is absurd that so much money is recycled from wealthy member states back into other wealthy regions of Europe. That is one of the many issues that need to be addressed.
Economy: Government Policies
Lord Vinson Excerpts(12 years, 4 months ago)
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Lord Sassoon
My Lords, what my right honourable friend the Chancellor said we would do is to stick precisely to the spending plans that he set out in the March Budget and the subsequent spending review. That is what we will do, and that is what will keep our interest rates low.
Lord Vinson
My Lords, as part of their measures to see what can help this poor old country out of its troubles, would the Government look at our huge imbalance of trade—currently running at about £30 billion a year plus? I am not suggesting for one moment that all those jobs could be done in this country, but it is the equivalent of about 1 million jobs that we are shipping overseas. There are some areas of our economy that could be done here. For instance, why do we need to import so much cement, which we can make in this country just as well as importing it from other countries? Could we not look at a sensible policy of import substitution to try to create jobs in this country that are being created unnecessarily in other countries, when we could do the jobs perfectly well ourselves?
Lord Sassoon
My Lords, our exporters are leading the growth in this country and indeed, although it is early days, there are some signs from the figures over the past 18 months that at last, after a decade of a declining share of world trade, the UK’s share is increasing. It is a modest increase and it is early days but our exporters are performing very strongly.