The Economy

Lord Davies of Stamford Excerpts

Thursday 28th April 2016 Lords Chamber

[Lord O'Neill of Gatley]

My Lords, as I said, I will make some further specific comments in answer to this question after I have heard the collective input of the whole of the House.

[Lord Davies of Stamford (Lab)]

My Lords, is it not the case that the Treasury document referred to by the noble Lord, Lord Forsyth, makes it absolutely clear that the growth in our income as a result of our remaining part of the EU will be much greater than would occur if we left the EU under any circumstances and that the amount of additional gross domestic product that would be generated as a result would be more than sufficient to cope with any additional costs involved in social security, health or educational provision?

[Lord O'Neill of Gatley]

My Lords, for now I shall try to answer that question in the context of the remaining part of what I had planned to say—otherwise I will be eating into everyone else’s valuable time.

As somebody who has spent considerable time exploring the rise of the so-called emerging world and the changing patterns of world trade, I believe that I can articulate the case for the UK to benefit from a rise in the role of China, India and others while continuing to benefit from being a member of the EU. Indeed, as was clearly shown in this document, despite the challenges that being a member includes, the growth in our trade has been quite considerable since we became a member.

It is important to recognise that the presumed changes in trade patterns that I have been at the centre of articulating may never happen anyhow: that is a possibility. Even if they do, though, it remains the case for the foreseeable future that the EU is set to remain our dominant trade partner, currently accounting for around 44% of our exports. As I said, there is no doubt that our membership has made it easier to trade with not only the EU but the wider world. Trade as a share of national income has risen to over 60% in the last decade, compared with under 30% before we joined the EU. Membership has also made the UK an attractive place for foreign investors, with the equivalent of £148 million invested here every day for the last decade. Almost three-quarters of foreign investors cited our access to EU markets as an important factor in their choice of the UK.

In conclusion, there have been indications recently that our economy is continuing to grow—but, as I have highlighted, there are clear risks to that being sustained. We must continue to work hard to address the systematic issues that are a barrier to strong growth, in particular those of weak productivity and our current account deficits, where the issues are genuine and not, as perhaps some aspects are, statistical quirks and issues of economic interpretation.

The financial markets will of course continue to watch closely what happens in the debate over the UK’s membership of the EU. This has clearly had an effect already in the recent past. Some measures of so-called sterling volatility have increased dramatically since January, and in the week following the February European Council the pound fell quite sharply. The Monetary Policy Committee commented a couple of weeks ago that,

“much of the fall in sterling reflects uncertainty surrounding the forthcoming referendum on the United Kingdom’s membership of the European Union”.

In the past week the pound has made a notable recovery as the markets have readjusted their probabilities concerning the EU vote outcome. No doubt this volatility will remain and possibly intensify.

The longer-term ramifications of us leaving could be far more wide-reaching than just volatility for the pound. In my judgment, a vote to leave would constitute a considerable risk to both our economic security and our global influence that we would be bringing on ourselves with no certainties about the alternatives. In that regard, it is not a risk worth taking. There are no silver bullets for our challenges. That is why the Government must continue to follow a long-term plan to take action over not just the next few months but the next few years and decades.

--- Later in debate ---

[Lord Davies of Stamford]

My Lords, like so many other people on both sides of the House today, I have been thinking intermittently throughout this debate of Maurice Peston. Maurice was not only a most original mind but a lovely human being, who was always warm, generous and kind to people in his personal life. He was devoted to those principles of social justice and internationalism that lie at the root of the Labour Party. He is a great loss to us all and we will all be thinking of his family and his children today, and wishing them well.

The Minister was quite right to identify in his remarks and put his finger on the two major hazards facing the British economy at present. The major clouds on the horizon are the current account deficit and productivity, and I agree with him about both. I agree with him about the current account deficit for the reason that he and the Governor of the Bank of England have already expressed: the level of more than 5% of GDP and the quite horrific number of claims on the British economy that are being accumulated every day by foreign investors through different means, including portfolio investment, direct investment, purchases of real estate and lending to the British Government by buying gilts. The effect of all that is that in investors’ portfolios the British weighting is increasing the whole time. Investors review their portfolios —their balances and limits—from time to time, particularly under the impact of a shock.

We face the dangerous prospect of a major shock on 23 June and that should rightly worry us all. That shock might well mean that those investors think that, on the terms currently available, they should not add to their portfolios in that way. That would mean that the terms available had to change. It would mean that the asset prices in all those asset markets had to be revised downwards, including sterling, of course. It would mean that yields and interest rates had to rise. It would mean that neither consumption nor investment was able to grow and might have to fall in this country, which would be a very bad day for the British economy. The Minister did not spend very long on potential remedies or actions he might take to deal with this hazard, which he clearly agrees should be taken seriously. I thought the suggestion that we might just wait for the rest of the world to increase its rate of growth was a somewhat complacent reaction.

I also agree with the Minister about productivity. He has had a kind of damascene revelation on productivity since he took over his responsibilities. I remember, as I expect he will, his first day out in this Chamber, I think at Questions, when he made the most appalling howler, suggesting that our productivity was higher than that of Germany. Unfortunately, because of how Question Time works, I was not able to get in—I tried—to correct the error at the time. Perhaps he was relieved that I was unable to do so. He certainly did not make that mistake today. As he knows, our productivity rate is something like 27% or 28% below that of France and Germany and, I think, 30% or 31% below that of the United States. That is deeply worrying.

Again, there was a lack of urgency in the Minister’s response to this. I am particularly concerned that he might be persuading himself that our low level of productivity is a reflection of high employment in this country. I am not familiar with the academic work that he cited but Germany and the United States also have high levels of employment and low levels of unemployment, so it is difficult to accept that hypothesis. Certainly, anything that leads to complacency from the Government on that point is very undesirable. The Minister does not have to listen to anything I say in this debate, but he would do well to take careful note of what the noble Lord, Lord Mair, said and adopt some of those suggestions. The noble Lord, Lord Mair, was very close to the heart of some of the long-term problems we face in this country and need to address with great seriousness.

Productivity is of course the basis for almost anything we want to do; it is the only way to increase exports or reduce imports without cutting consumption or investment. It is the only way to increase real wages, except in the short term at the expense of profits, which is not a very clever thing to do because that is at the expense of future investment and growth. So productivity is the key, but what you do about it? I think we all agree on what needs to be done about it: you need to invest, as the Minister said, in human capital, which is very important. You also need to invest, classically, in physical capital—in hardware and software. To invest, you need investor confidence. This is fundamental but simply lacking here at present, unfortunately. If you want investor confidence, you must have buoyant markets, open markets and investors who have confidence in the macroeconomic and microeconomic circumstances in which they exist.

The one thing you do not want to do if you want to increase investment is to reduce access to markets or in any way to damage investor confidence. The Brexit campaign does precisely those things—it is really quite extraordinary. It is difficult to think of a more negative programme for the British economy than the one being put forward by the advocates of Brexit.

Let us look at the foreign trade position. One can conveniently divide the world into three. Some 45% of our exports go to the EU, slightly less than a quarter go the United States and roughly 30%, for the purpose of this argument, go to the rest of the world. The majority of the roughly 30% is now covered by individual or collective foreign trade agreements signed between the European Union and those countries or groups of countries. There are about 35 such agreements, affecting about 55 countries, including with Canada and Japan, which I do not think have been ratified but have been negotiated. The Brexit proposal would involve our leaving the European Union and, that very day—that very night—we would leave those foreign trade agreements. We would no longer be able to benefit from them. Under WTO rules, we would not be allowed to go on benefiting informally from them for an interim period. The counterparties would have to extend to us their standard duties and other provisions—tariff barriers, non-tariff barriers and so forth. To negotiate agreements with those countries would take years—at least five and probably seven or eight, typically, for a foreign trade agreement. There is also no certainty that those countries will necessarily want to come to such arrangements with us and they certainly would not feel the urgency that we might. We would be the demandeur—the party demanding and requiring a deal and therefore having to make concessions. That would hardly be a clever day’s work in the national economic interest.

Then there is the United States. The United States and the EU are well advanced in negotiating TTIP, though far from having completed it, of course. We now know from the words of the President of the United States himself that there is no question of interrupting that process, which will proceed and we will not be part of it, so we will have a tremendous handicap in the US market compared to our erstwhile single-market partners. That would continue—we know, again, from the horse’s mouth, the President of the United States—for years. We would then have to start a negotiation that would take many, many years—what an appalling prospect.

It would be difficult to think of a greater blow to investor confidence than that, but there is one—our access to the 45% area, the European Union. No one on the Brexit side has a clear, coherent or remotely convincing proposal for what the relationship might consist of. We have heard of Switzerland and Norway and that Mr Johnson wants a Canada-type agreement. He said that before he realised that the Canada/EU trade agreement includes hardly any services. If I recall, it includes maritime and mining services, but they are a fairly small part of GDP. Certainly there are no financial or digital services, media and so on, the things that are important. That was an extraordinary howler on his part. Mr Gove wants us to have an Albanian-type arrangement.

No one is clear. They have not given five moments of thought to the serious economic issues involved. It is all rhetoric to them—a matter of metaphor and saying to the British people, “Oh, there are sunlit uplands. It is all wonderful. Believe me, we are going into a brave new world”. It is a snake-oil salesman’s approach to dealing with naive people. It is extremely frightening, but there it is. I do not exaggerate a bit because here are these major issues against which there are zero serious proposals as to how the damage to this country might be mitigated.

The Minister said that there are no certainties in this matter. I disagree. There are one or two real certainties, one of which is that there is no benefit to the country potentially in any of these alternative arrangements. No one can or has claimed that the route of trying to negotiate, laboriously and over many years, new foreign and trade agreements separately with all the countries which currently have foreign and trade agreements with the EU would lead to a better outcome for us than we currently have within the context of those FTAs. No one has or could plausibly argue that. It is quite certain that the results could not be better. Almost certainly they would be a great deal worse, but they could not be better. No one has suggested or could plausibly suggest that we could do a better deal with the United States than TTIP. It could be much worse. It will not happen for a long time but it could be much worse. Certainly it cannot be better—no one is suggesting that it could be—and the United States has said that it would not give better terms to us than to the European Union as a whole. There is no question of being able to negotiate better terms than we currently have with the single market and the European Union that remains. No one has suggested or claimed that.

We are in a position in the equation where we know that the sign on the critical factor is negative. There is no positive compensating sign. It is not a matter of uncertainty but of clarity. Certainly we do not know how bad the results will be but we know they can be only bad in relation to the status quo. What kind of responsible politician would make that kind of suggestion to the British people?

Not one job would be created—nor has it been alleged would be created—by the mere fact of our leaving the European Union. We can argue all night about whether hundreds of thousands or millions of jobs might be lost—and over the long term, given the opportunity costs and the forgone investment, the consequences could be very grave—but no one from the Brexit camp has even suggested that a single job would be created. That is an extraordinary state of affairs which I hope the British public will wake up to, otherwise we might well do something which will be one of the greatest manmade, deliberate, self-imposed disasters in economic history.