Trade and Investment

Lord Davies of Stamford Excerpts

Monday 15th June 2015 Lords Chamber

[Lord Davies of Stamford (Lab)]

My Lords, I agree very much with what the noble Lord has just said about the European Union. It is a great pleasure to be the first from the Labour Benches to be able to congratulate the noble Lord, Lord Maude, on his maiden speech, which was characteristically informative and—perhaps not characteristically but certainly quite notably for anybody who knows the noble Lord as I have for many years—unpartisan. We very much look forward to his contributions to this House. I do not want to be hypocritical. The noble Lord and I have known each other for a long time, we have not always agreed and we certainly did not always agree when we were members of the same party. We did not agree about matters such as Europe and economic policy even when we were members of the same Front-Bench Opposition team in the other place. That was a bit awkward because the noble Lord was shadow Chancellor at the time and I was shadow Paymaster-General. Nevertheless, I have always respected the noble Lord because he is a politician who believes in something. That is not always the case, as we know. He has always had an agenda. It might not have been mine, but there always was an agenda and I always had high personal regard for him on those grounds. In that respect—as well as the many other talents he has—he is very much in the tradition of his father, whom I met in 1977 when he was kind enough to come and support me in my first election, the Ladywood by-election. I have the fondest memories of his father, and many people in the House who were good friends of Angus Maude will have been delighted to have heard his name mentioned again today in his son’s maiden speech.

The noble Lord takes over his very important brief at a time when our trade in not in a very healthy state at all. We have a current account deficit of 4.2% and rising—that was the figure for 2013; I have not seen the figure for 2014—and it has actually doubled since 2010. That is a very worrying, chronic balance of payments deficit. Why is it a problem? Clearly, it means that we are consuming more than we are producing. We are building up international liabilities. We certainly do not have any problem financing those at present. There are a lot of portfolio flows into this country. People are buying apartments in Mayfair and so forth. Foreigners are buying gilts because there is a considerable yield premium on gilts in relation to other prime European sovereign credits. All that is fine, but we know that these flows are very volatile over the long term. They can go backwards as well as forwards, and it is not good to be in a chronic and permanent major current account deficit. Indeed, it simply cannot go on. What do we do about it? That is a matter which the House should focus on and the noble Lord has given us a good opportunity to do exactly that.

Some people would say that the obvious answer if you have a current account deficit is to increase the savings ratio. But you cannot increase the savings ratio just like that, and if you could the solution would involve substantial reduction in consumption, which is hardly welcome news to the people of this country and hardly a policy the Government would want to propose. What one needs to do is to turn it round the other way and to make sure that we are increasing output per person—in other words, increasing productivity. I put it to the noble Lord that that is the most important task at present facing anybody with any responsibility whatever for the economic governance of this country. I am extremely worried that the Government do not seem to appreciate that. We heard nothing about productivity before the election campaign from the Government, and we have heard a few things about it since but they are extraordinarily misinformed. I was absolutely horrified—I must put it very frankly; there is no hyperbole in using that term—this time last week in this House to hear the noble Lord’s colleague, the noble Lord, Lord O’Neill of Gatley, say,

“Germany, which is generally regarded as successful and whose measured productivity has been even weaker than ours in the past few years”.—[Official Report, 8/6/15; col. 628.]

I repeat,

“weaker than ours in the past few years”.

That is what the government colleague of the noble Lord, Lord Maude, said in this House last Monday. How can he possibly have been so ill-informed?

Of course, productivity is measured by professional statisticians, be they in the OECD, the IMF, the European Commission or indeed our own national statistical service. I have before me the latest statistical bulletin dealing with these matters, issued by the Office for National Statistics on 20 February 2015. I will quote from the paragraph headed “Current price productivity” on page 3, which states that,

“UK productivity in 2013 was … Lower than that of France, Germany and the United States by 27-31 percentage points … Lower than that of the rest of the G7 by 17 percentage points”.

It is a deeply worrying and shameful record—and what is even more worrying and shameful is that the Government do not seem to realise it. I have to say that the comment in this House of the noble Lord, Lord O’Neill, shows either the most colossal ignorance, the most colossal complacency or the most colossal cynicism. I hope that, before the end of this debate, we will hear from the government side some explanation of this extraordinary state of affairs, because they are denying reality.

We must do something about productivity. How do we do that? The classic answer is that you increase investment per employee. How do we do that? That is the question to which we should address our minds this afternoon. The popular view of investment is that it consists of purchasing plant and equipment and applies only to manufacturing industry. That is doubly wrong. It does not consist just of purchasing plant and equipment; it could consist of purchasing buildings, software or licences, or investing in human capital by setting up training programmes for employees. All this is investment, which is defined simply as money that you spend in the current period not for some gain in that period, nor to be able to consume it or generate profits in that period, but for the opportunity to make profits and enjoy consumption in the future. That is the simple definition of investment that I think the whole House will agree with.

The question is how you go about enhancing those things. All of them are very important. Let us take the service sector. A restaurant that invests in a new digital ordering system increases productivity by purchasing equipment. A garage that invests in a new electronic diagnostic system for dealing with cars is in the service sector but is making a capital investment that will increase productivity. Employees will have to be trained to use these things. These businesses are investing in human capital and increasing productivity as a result. I remember well that in my business days my shareholders paid quite a lot of money for me to spend a month on an intensive course to improve my German. It turned out to be a very good thing for my subsequent productivity. They spent another large amount of money sending me on the advanced financial programme at INSEAD, and I have not the slightest doubt that that, too, increased my productivity. Investment in human capital is extremely important and we need to make sure that we have in place incentives that drive all these forms of investment. The last Labour Government introduced, at the behest of Gordon Brown, special tax credits for research and development. They have proved to be a very good incentive and have made a very useful contribution.

There is a strange tax anomaly in the area of investment. Tax follows the rather artificial conventions of the accounting profession; certain forms of investment are regarded as investment and certain forms are regarded as current spending. If you invest in software, you can write it off as an expense in the current period, but if you invest in hardware, you cannot: you have to depreciate it over its useful life, or over a maximum of four years. So there are many anomalies in these matters, and my first suggestion for the noble Lord is that he discusses with his Treasury colleagues the possibility of introducing a system of 100% write-offs for capital equipment by investing businesses, irrespective of whether they are in the manufacturing sector or the service sector. That would be a useful incentive to increase investment. It should be done not just as a gimmick or for a short period, which would distort investment flows; but over the long term. This would be logical, because it would be treating investment of that kind as a current expense, which is how other forms of investment are treated.

The second thing the noble Lord could do is something he has already touched on. It is enormously important for investor confidence in this country that it becomes clear as soon as possible that we shall remain part of the European Union. The noble Lord talked about all the trade agreements which the European Union has around the world and how important they have been in enabling us to increase our exports, and he is absolutely right. I think I am right in saying—the noble Lord will correct me if I am wrong—that the European Commission has so far negotiated, or is in the process of negotiating, about 45 trade agreements with other countries or trading groups around the world. That is a very considerable achievement. It takes many years, as he knows very well, to negotiate any of these agreements. An enormous amount of effort is required, even when you have the whole weight of the European Union behind you with an enormous incentive to any counterparty to come to some arrangement.

If we left the European Union we would lose overnight the opportunity to benefit from all those trade agreements. What an absolute nightmare that would be. We would have to set up, start again and persuade all those countries to negotiate some separate deal with us, which many would not have the time or patience to do. They would have other, greater bureaucratic priorities, and if they did so at all they would demand a sort of payment—some concessions which they would not have expected to receive from the European Union as a whole. It would be a very bad day’s work for us, and it is very important that the uncertainty that now exists is remedied, so the second thing the noble Lord could do for investment is to talk to his colleagues and make sure that, now that we are going to have this referendum, we have it as soon as possible to limit to the minimum amount of time the economically damaging uncertainty which we now face.

Thirdly, if the noble Lord wants to do something about productivity, he should speak to those of his colleagues who are responsible for infrastructure. We are taking far too long to build necessary infrastructure, such as the new high-speed train. It should have been built years ago. What is absolutely appalling is the uncertainty about the future of the London airports system. Airports are extremely important for investment decisions, for the location of investment, management and important organisations within firms, particularly R&D and marketing companies and so forth, and these are people who need to travel a lot; if you do not have a good airline hub close to where you intend to locate them, you will not locate them there. In many cases, these people are extremely highly paid and are therefore extremely productive, and that is very important for trying to increase output per man or woman and productivity in the economy. The uncertainty about the new runway at Heathrow—which is quite disgraceful and had we had a Labour victory in 2010 it would have been built by now—must not be allowed to run on any longer. I hope that the noble Lord will have a very positive influence with his colleagues on these important matters in the months and years to come. I am sure that we will enjoy many debates with him on these important issues.