Economy: Growth

Lord Forsyth of Drumlean Excerpts

Tuesday 29th January 2013 Lords Chamber

[Lord Eatwell]

My Lords, it is a particular pleasure for me to welcome the noble Lord, Lord Deighton, to the Dispatch Box and to congratulate him on his appointment to the Treasury team. It is always a special delight to see one’s former pupils do so well. When I marked his economic essays back in the mid-1970s, I never imagined—nor do I suppose did he—that we would find ourselves in this situation. I think it is appropriate to report that his essays were typically examples of excellent economic analysis, and I hope and believe that he will put those skills to good use in re-educating the Treasury. It certainly needs it.

Today, he has been placed in an extraordinarily difficult position. It is rather difficult to defend the Government’s growth record when there is none—growth, that is. The latest figures are truly awful, with no growth at all in 2012, despite the heroic efforts of the noble Lord, Lord Deighton, and his team at the Olympics.

Taking the longer view, since the Government’s spending review in the fourth quarter of 2010, when it might be said that coalition policies replaced Labour policies, the UK economy has grown by just 0.4% over that entire period. Over the same period, the USA has grown by 4.2%, Germany by 3.6% and France by 1.5%. Accordingly, while the UK economy is now still over 3% below its pre-crisis peak, the USA is 2.5% above and Germany is 2% above.

The question before us today is: in the situation in which we find ourselves, what is to be done? How can we get Britain back on to a secure growth path? Should we follow the recommendations of the Chancellor of the Exchequer that we stick with austerity, accepting his declaration that “Britain is on the right path”? Let us call this plan A. Or should we adopt plan B, following the advice of Adam Posen, former member of the Monetary Policy Committee, and particularly of Olivier Blanchard, chief economist of the IMF, who said last week,

“if things look bad at the beginning of 2013—which they do—then there should be a reassessment of fiscal policy … We think that slower fiscal consolidation in some form may well be appropriate”.

That is the IMF view on Britain.

The answer to our question, “What do we do?”—the fundamental issue in this debate—rests on a consideration of three issues. First, how did the Government get into this mess and are they tackling it in the best way? Secondly, what is necessary to restore the UK economy to growth? Thirdly, what is there to prevent us following this path of restoration?

So, first, how did we get into this mess? As the noble Lord said, the Government inherited the terrible economic consequences of the international financial crisis—everyone agrees about that. These consequences were and are particularly severe for a country as dependent on financial services as we are. But then the crucial question is: in the past two and a half years, have the coalition’s policies made things better or worse?

The previous Chancellor, my right honourable friend Alistair Darling, had been battling the crisis since 2008, and by the spring of 2010 he had succeeded in beginning to turn things around. Recovery was under way at a similar rate to that in the US and Germany, so that George Osborne inherited an economy growing at an annual rate in excess of 2%. He killed that recovery stone dead. He destroyed business confidence by preaching the coalition dogma of austerity and by foolish and demeaning comparisons with the plight of Greece and other eurozone countries without their own currency and exchange rate; he slashed public investment so that in the past three years the Government have spent £12.8 billion less in capital investment than Alistair Darling had planned; and, with savage glee, the coalition set about shrinking the state and impoverishing the poor. This is all justified in terms of the Tory manifesto commitment to eliminate the deficit in one Parliament—a commitment, by the way, which will not be kept, for the deficit is not falling.

Recent figures published by the Office for National Statistics show that public sector net borrowing in the first nine months of fiscal 2012-13 was about £107 billion compared with £99 billion in the same period last year—a rise of 7.3%. I repeat: the deficit is over 7% up on the equivalent period last year. So the answer to the first question is that the coalition inherited a very difficult but recovering economic situation and proceeded to make it much, much worse.

What should be done to turn the position around again and to set the economy on a new growth path or, to put the question in a more practical fashion, how can businesses be encouraged to invest? Firms invest because they are reasonably confident in the future demand for their products. Without demand, if they are shackled by a framework of fiscal discipline, as referred to by the noble Lord, it does not matter how much cheap money there is, as no one will invest. That is why monetary policy is not working. Interest rates can go no lower and the first positive announcement effect of quantitative easing has now worn off. Quantitative easing may be inflating asset prices and ruining pension funds but cheap money will not encourage investment when the Government are intent on slowing the growth of demand.

However, if there is a prospect of growing demand then, to invest, firms need finance and access to the very best skills and technologies to secure markets in a competitive world. Demand is the key to making all the measures that the noble Lord referred to as his fourth pillar work.

That is why my right honourable friend Ed Balls has proposed a temporary cut in VAT to boost family incomes, together with the boost to demand and capacity that would result from bringing forward infrastructure investment, including building thousands of affordable homes. Enhanced demand prospects would then be underpinned by a British investment bank to boost lending to small businesses, complementing fundamental regulatory reform of the banks. To sustain confidence there should be a compulsory jobs guarantee for the long-term unemployed and, further up the employment chain, investment in skills and in transformational science and technology. That is plan B.

Why cannot this be done? “Because”, cry the coalition, “it’s a policy for borrowing more when debt is the problem”, and we heard a similar statement from the noble Lord today. But hang on, at the moment, as we all know to our cost, spending cuts are resulting in a growing deficit. How can this be happening? The IMF has provided the answer and it, at least, has acknowledged its earlier mistaken commitment to austerity.

The answer lies in the relationship between changes in spending and the overall performance of the economy. This is measured by what, in the economics jargon that the noble Lord and I used to discuss, is called the multiplier. If a cut in government spending of, say, £2 billion results, for whatever reason, in a fall of output of just £1 billion, then the multiplier is a half. That is what the IMF believed the multiplier to be back in 2009. The share of taxes in output is about 40%, so if government spending is cut by £2 billion and output falls by £1 billion, tax revenues fall by about £400 million. The fall in tax revenues is much less than the cut in spending, and so the deficit falls by £1.6 billion. That was the policy that the Government thought they were implementing.

However, what if the multiplier happens to be bigger than that? Supposing that it is as large as 2.5, the cut in spending results in a fall in tax revenue of exactly the same amount. You can go on cutting taxes until the cows come home and there will be no change in the deficit at all. All that will happen is that the economy will be driven further and further into the mire of depression.

In acknowledging a previous error, the IMF estimated the multiplier to be a bit less than two, so a £2 billion cut in government spending will drive the economy down by about £4 billion and, when cuts in revenue are taken into account, the deficit will fall by only £400 million. Throw in a depressed European Union and you arrive at our current miserable situation: ever bigger cuts and a growing deficit. But the good news is that what goes down can also go up. What if government spending is increased by £2 billion and the multiplier, optimistically, is 2.5? The economy then grows by £5 billion and the increase in tax revenues pays for the extra spending; there is no extra borrowing at all. I repeat: increased spending results in no extra net borrowing. Plan B is a strategy to cut government spending. And there is more. The government cuts—particularly those disastrous cuts in government investment—not only reduce output now by cutting demand; as the OBR has pointed out, they also cut future output by reducing the real productive capacity of the economy.

[Lord Forsyth of Drumlean]

My Lords, I am a simple lad. Can the noble Lord tell me what the difference is between his party’s policy and that of the government Front Bench? He gave the figure of £2 billion as the extra borrowing and the extra expenditure that would be required. In quantitative terms, what separates the Opposition from the Government? How much money are we talking about?

[Lord Eatwell]

The figure of £2 billion was purely for illustrative purposes; it was a simple number. I thought that people could do the arithmetic in their heads. The issue is directly whether we continue with a policy of cutting government expenditure or whether we are committed to an increase in expenditure, particularly on infrastructure. Your Lordships will note that the noble Lord did not say that his infrastructure plans fell outside the tight vice of austerity policy. That vice must be unwound. That is what I am talking about today.

As I was saying, there is more to it than that. As the OBR has pointed out, government cuts in investment cut future output by reducing the real productive capacity of the economy. This long-term loss of output brings with it a long-term reduction in tax revenue, in addition to the medium-term effect that I have just outlined. In other words, the Government are not just failing to cut the deficit now; they are increasing deficits for years to come. By contrast, if the IMF is right, the measures proposed by my right honourable friend will be substantially self-financing in the medium term and will stimulate tax revenues in excess of spending in the longer term. This point has also been argued by the Harvard professor and former US Treasury Secretary, Larry Summers.

Before we sign up to plan B, however, another issue must be confronted. Today, any Government’s finances can be devastated by a loss of confidence in the international bond markets. The noble Lord referred to this. After a particularly violent example of sovereign bond market hysteria, James Carville, the political adviser to President Clinton, famously remarked,

“I used to think if there was reincarnation, I wanted to come back as the President or the Pope … But now I want to come back as the bond market. You can intimidate everybody”.

Well, the bond market certainly seems to have intimidated the coalition. Whenever its destructive policies are challenged, it argues that unless the vice on Britain is tightened, the financial markets will lose confidence, interest rates will rise and any prospect of recovery will be destroyed.

There are three things wrong with that argument. First, no one is suggesting a spending spree. Plan B is a cautious expansion to begin the task of building the foundations for growth. Secondly, it is austerity that is now undermining market confidence. All three of the main credit rating agencies—Standard & Poor’s, Moody’s and Fitch—have put Britain on “negative outlook”, citing concerns over the weak recovery and the public finances.

Thirdly, let us consider the experience of the United States, which lost its AAA rating last year. Would you rather have our AAA rating and zero growth or the lower US rating and 3% growth in the last quarter? I know which I would prefer.

The noble Lord, Lord Deighton, outlined in his speech a number of desirable measures that the Government can take to help to build productive capacity—the structural measures to which he devoted the majority of his speech. However, the Chancellor’s commitment to cutting demand and shrinking the state—less Bullingdon Club, more Tea Party—is eliminating any significant impact of those worthy measures. The Government’s attempt to stimulate growth has been a failure; the Government’s attempt to cut the deficit is a failure; and, if informed predictions are correct, even the Government’s attempts to preserve Britain’s AAA rating in the markets will prove to be a failure.

The coalition is now responsible for the longest slump in the British economy in the past century—longer than the great depression—yet last week George Osborne said something truly chilling. He said:

“We can either run away from these problems or we can confront them and I am determined to confront them”.

What is it in the word “failure” that George Osborne does not understand? For the sake of this country’s economy, it is time for him to run away. He is the living embodiment of plan A and must accept responsibility for its failure. Perhaps I may suggest that an excellent replacement as Chancellor would be my former pupil, the noble Lord, Lord Deighton.

--- Later in debate ---

[Lord Forsyth of Drumlean]

My Lords, it is a pleasure to follow the noble Lord, Lord Mitchell. I just wonder whether he is a little overenthusiastic in his belief in the Government’s ability to pick winners, especially in the IT sector. As I recall, billions were lost in the health service and elsewhere through IT projects that were not properly sourced and not subject to the disciplines of the marketplace—projects that arise from people spending other people’s money. It is also a great pleasure to welcome the noble Lord, Lord Deighton, to the Front Bench.

I have been surprised that, so far in the debate, people have concentrated on the deficit rather than the debt. The noble Lord’s predecessor, the noble Lord, Lord Sassoon—whom we miss so much—was subject to regular questioning from me, asking why we continue to refer to reducing the deficit and not the debt, when, of course, the deficit is simply the rate at which the debt is increasing. I never got a satisfactory answer to that. Therefore I ask the noble Lord, in briefing himself into his department, to look at the ComRes ITV poll that was carried out just before Christmas—which may have got lost in the tinsel and bright lights of the Christmas period—where people were asked whether they thought that over the course of this Parliament the Government were going to increase the debt by £600 billion, reduce it by £600 billion, or leave it much as it is. Only 6% got the right answer, which is that the debt will increase by £600 billion. I regard that as a really serious problem, because if you are asking people in the country to make sacrifices and to realise that Governments face difficult choices, first you have to make them aware of the extent of the problem. I really do not think it helps for politicians—from whichever party—to shy away from explaining just how serious a problem we have.

The problem, in short, is that the state is growing and the economy is shrinking. The latest OECD figures show that state spending has now gone up to 49% of our GDP. That is an extraordinary amount. I used to define communist or socialist states as states where the Government spent 50% of the GDP. In the year 2000, when Gordon Brown was Chancellor of the Exchequer, the Government spent 37% of GDP. I am sorry that the noble Lord who said that it is ridiculous to talk about a massive Keynesian boom is not in his place, because I must point out that there has been an astronomical increase in the share of our GDP that is being spent by the Government. Out there in the country, real wages and living standards are falling. The first thing that we have to explain is that we have been living beyond our means. We have been spending about 10% more than we earn and we have been saving nothing. We need to save about 10%. Now 10 plus 10 is 20%, so to put that right, living standards are going to fall by 20% unless we can get growth. It should come as no surprise that this has come about.

The national debt is now 70% and rising. It rose by £15 billion last month alone. I know that we are all supposed to take the line that the Chancellor has cut the deficit by 25%, but the truth is that he met the target last year only by putting in Billy Bunter's postal order, which is the £3.5 billion that will come from the 4G spectrum sale—money that we do not have now and will come around only once—and by throwing in the proceeds from the interest on the bonds that have been purchased by the Bank of England printing money.

We are engaged in a completely new scheme of quantitative easing, which has been done on a stupendous scale. We are now relying on the interest on that money that we have created to say that we are closing the debt cycle. I am profoundly concerned by that. Every time I ask an economist or someone I respect about this, I find it very difficult to get the kind of reassurance to which the country is entitled.

On the Government's policy, if you ask a Minister what they think will happen to the growth in the economy in the next 12 months, they will say, “We are not responsible for that. We have an independent body called the OBR”. But the OBR has been consistently wrong in all its forecasts. My noble friend Lord Lamont said quite rightly that all forecasters are consistently wrong. But it is worrying to say the least that this independent body that Ministers now rely on has been so far off the mark.

The truth is that the Government are stuck in a Bermuda Triangle. We have low growth, which means that the Government cannot make cuts in spending, and we have high spending, which is preventing us from getting the growth that we need. People may have forgotten this, but much is due to the efforts that were made by my noble friends Lord Lamont and Lord Baker, my noble and learned friend Lord Howe and others in the 1980s in making supply-side reforms and changes to the trade union law; the changes to our labour market policies. That is why employment has not gone up in this dreadful recession. Workers are now able to make arrangements with their employers to be flexible in the teeth of economic adversity.

The Government have made some mistakes, and we should admit to those mistakes. The noble Lord, Lord Eatwell, sent me a note to say that he had to leave the Chamber so I know that he will read this in Hansard, but it was sheer bare-faced cheek for him to argue for capital expenditure, which is right, and against the Government’s capital expenditure cuts, when the mistake that the Government made was to implement Alistair Darling's cuts in capital expenditure but actually reduce what was planned by Alistair Darling. The point is well made. Capital spending is required and we need further supply-side changes.

My noble friend Lord Wolfson made the key point in this debate. You have to look at the return on the money, and, on the whole, Governments are not very good at picking winners. Therefore, to choose a well-known liberal's favourite phrase, if you leave the money in the pockets of the people to fructify, you will get far more growth and far more for your money than if it is decided by committees in Whitehall with one eye to the next election. An example of that is this high-speed train. The high-speed train is the ideal political project. It is absolutely fantastic. It enables a Government to say that they are spending a large amount on infrastructure. It has a visionary appeal about it. And, of course, the planning, the implementation and the execution are so far ahead, you do not have to spend a single penny on it. In doing so, it creates all kinds of difficulties for the local economy and the blighting of property and so on. I would rather see the money being spent now on improving our transport structure and looking, as my noble friend Lord Wolfson said, at issues like road pricing and others that will help to make the changes necessary to get our economy to grow.

Again and again we hear complaints from both sides of this House about the banks not lending money to small businesses. I want to ask my noble friend, who I know has a background in banking and will be turning a fresh eye to this matter: how are the banks supposed to lend money to small businesses when at the same time they are being asked to increase the amount of capital that they have in order to support the lending that they have got? How are the banks supposed to find the money to lend to new businesses when they are being asked at the same time not to foreclose on mortgages and to try and keep businesses going? How are the banks supposed to find the money when there are companies—many of them now—substantial public companies, zombie companies, that are simply kept alive by low interest rates and by the banks not wishing to consolidate the loans on their balance sheets.

Of course, we are very conscious of the banking crisis and the impact that it had on our economy, but are we now not in danger of fighting the last war? Should we not be adopting a counter-cyclical approach to the capital requirements on banks in order to solve the problem? Frankly, producing lots of government schemes is not the answer. Better to have banks making commercial decisions with the balance sheet flexibility to be able to lend to these small businesses. This was a point that my noble friend Lord Lamont touched upon in his excellent speech.

How are the banks supposed to operate when the regulators, as a regulatory requirement, are requiring them to take Government gilts? We all know what is going to happen to Government gilts as the interest rates go up and quantitative easing unwinds. What is going to happen then to the losses being made as a result?

The reason that we are becalmed as a country is because the tax burden has become unbearably high. I am not here making a plea on behalf of people who pay high marginal rates of tax. If you earn between £8,105 and £42,475, taking the income tax and the national insurance payments that you and your employer has to pay, it is no less than 40.25% of earnings. Is it any wonder that we see so many part-time jobs, not full-time jobs? The costs of labour are unbearably high because of the burden of taxation.

For those on the other side who say it is all about tax dodgers and finding rich people, the top 1% of taxpayers now provide 24% of all the income tax but only 10.8% of the income. That is why the tax burden is now hitting people on low incomes and hitting them hard.

Indeed, I had the pleasure of chairing the tax commission for the Chancellor while we were in opposition. I remember that we agreed that we needed lower, fairer, flatter, simpler taxes. What are we doing? According to the TaxPayers’ Alliance—an excellent body—we have created 299 separate tax increases and 119 reductions. Whatever happened to that great crusade to have a simpler, flatter, fairer tax system? I tell you this: if we do that, the revenues will go up and the deficit will go down.

I welcome the rise in thresholds. The Liberals claim the credit as their policy. I see my noble friend is nodding with enthusiasm. I refer him to the speeches made while we were on the Benches opposite by the noble Lord, Lord Saatchi. It was also one of our recommendations in the tax commission report in 2006. My cautious right honourable friend the Chancellor felt that our programme of tax changes, which would have amounted to £25 billion, was more than could possibly be afforded in a Parliament where borrowing now goes up by £15 billion every month.

On quantitative easing, I would like my noble friend to explain exactly how it will be unwound. The Bank of England made gains on the gilts which have been bought through this process of about £60 billion a year ago. What is the value today? What will happen when interest rates go up? How will that gap be closed?

My noble friend Lord Wolfson is a grand and successful retailer and I echo what he said about planning. Perhaps the House will allow me one indulgence. My eldest daughter has just started her own business and opened a shop on the King’s Road in the worst possible circumstances of recession. Kensington and Chelsea is a Tory council but it took eight weeks to give her planning permission to put her name above the door—eight weeks while she was unable to trade and while it charged her rates for the privilege of waiting on it to give planning permission. It should be utterly impossible to operate in this way in the difficult circumstances that we have in the marketplace now. We have heard from my noble friend Lord Wolfson of the experiences of big businesses. At least he will have some clever people in his department who will be able to take on the planners. If you are setting up your own business, there is only you. In all the speeches we make about deregulation and supply side reforms, let us get down to the detail that is preventing businesses expanding and growing.

I have said that the economy appears to be becalmed. If you are becalmed, you need a wind of change, and that will come from reducing costs to businesses and reducing costly regulation. I have some sympathy with what the noble Lord said about reducing the cost of national insurance. We should stop thinking of new schemes that make life more difficult for business, such as changing the rules on paternity leave or introducing 1% pension schemes. I read in today’s Times that all businesses are to be asked to produce information on the ethnicity of their employees when they want to be out there selling to customers and winning exports.

What is going on in this country when, since 2008, our currency has been depreciating and our exports have gone up by 1% while exports in Germany, France and Holland have gone up by 9%? What is going on? Why are we not more successful in our export efforts?

On energy costs, what are we thinking of? By adding to the cost of energy on business, all we are doing is importing carbon from China, and China is lending the money to enable us to run a deficit while our businesses are disadvantaged as a result.

[Lord Lea of Crondall]

The noble Lord mentioned that we are devaluing the pound but nothing is happening. Why is that? Does he think that devaluation no longer works?

[Lord Forsyth of Drumlean]

I have been saying for the past 15 minutes that we need to create an environment in which our businesses can go out and sell and are encouraged to do so. I was not making a particular point about devaluation: I was saying that we are more competitive as a result of the falling value of the pound relative to other currencies.

To conclude, my advice to my noble friend is to say to his right honourable friend the Chancellor of the Exchequer that no U-turn is necessary but a touch on the tiller is required.

--- Later in debate ---

[Lord Lang of Monkton]

My Lords, it is a pleasure to follow the noble Lord, Lord Barnett, who has often been a distinguished participant in these economic debates, even though I certainly disagree with what seemed to be the central thrust of his argument today, as so often in the past. Like other noble friends, I welcome my noble friend Lord Deighton to the Front Bench and wish him all success. I thought his opening speech was crisp and lucid with a number of very good fours to the boundary.

Before I go further I should like to declare my interests as per the register, with particular reference to Marsh & McLennan Companies Inc, which has a subsidiary by the name of Mercer. Mercer is heavily involved in pensions and I hope to say a word about pensions in the course of my remarks. However, I have had no input from Mercer over this speech and indeed, it does not know that I am making it, which may cause it some concern.

My first point is that the whole debate of austerity versus growth is completely facile and futile. It is totally misguided. The distinction is spurious because austerity is fundamentally a growth policy. It is at the core of our economic management. Unless we reduce the deficit and tackle the debt, confidence will fall, interest rates will rise and the crisis that we have inherited and are emerging from will return.

Like my noble friend Lord Howell, I will not enter into the sterile argument on which the Opposition seem to be salivating about one quarter’s provisional figures on the deficit. For the past year we have been flat-lining—the figures add up to zero. They may be adjusted more favourably once the fourth quarter is studied further. However, it is perfectly normal, after a serious recession, that there is an early bounce back and then a period of flat-lining or even a further fall. It has gone on longer in this case because we inherited a bigger crisis. Our banks are constipated. The continuing euro crisis all last year affected both confidence and our markets. In passing, oil accounted for 0.2% of the deficit in the fourth quarter because production has been substantially lowered, mainly as a result of maintenance programmes which are now being completed. Therefore we may feel a compensating bounce back in the next and subsequent quarters.

I think that GDP is really only one measure of performance and not a particularly reliable one. Here I again agree with my noble friend Lord Howell. However, it is one on which there are grounds for cautious optimism. Some City forecasts expect growth of 1% this year, rising possibly to 1.5% towards the end of the year. That is slower than the United States but faster and higher than the eurozone. Employment, not much mentioned from the Benches opposite today, already gives grounds to support that theory. Indeed, even between September and November, in the fourth quarter, there was an increase of 113,000 jobs. Another indicator, the savings ratio, is now around 7.5% which is higher than at any time since 1997, so the private sector seems to support a tight fiscal policy, although ironically that may in fact slow growth a bit when coming from the private sector. However, with real disposable incomes up by more than 2%, there is now the beginning of empowerment of the housing sector and the private sector generally. The Funding for Lending scheme is widely supported by the banking sector. It is helping to reduce banks’ funding costs and in the past two or three months there has generally been a sharp rise in credit availability, not least with £50 billion worth of guarantees for infrastructure projects.

Standing firm on our deficit reduction targets is absolutely vital but as progress is made—it is already being made with the deficit down from more than 11% to less than 8%—gradually some leeway will emerge and gradually new policies will be developed. That is as it should be. It does not undermine plan A. It simply builds on the progress that plan A will be delivering. I particularly welcome the way in which my right honourable friend the Chancellor has advanced his policies in reducing corporation tax. At long last we are becoming competitive there and I think that will reap dramatic and relatively early benefits to us —the Laffer curve will kick in. There has been a massive rise in the tax threshold for the low-paid, taking 24 million people out of tax. That is a very valuable growth policy because the money released back into the private sector recycles very quickly.

The focus by many commentators on our austerity programme is actually somewhat misplaced. There is a view among commentators, including those of the IMF, that the impact of tax rises and spending cuts, necessary for other obvious reasons, does not impose a major drag on growth. Other factors do come into play. I believe that lack of credit and liquidity are very serious ones. They are the real problem. Banks, to a unique degree in the United Kingdom, were massively overleveraged and underregulated for the first decade of this century. That was the distinguishing feature of the United Kingdom’s crisis. As they struggle to retrench, their lending is paralysed. They have also neutralised any benefit that quantitative easing might have delivered because they hoard the resources that it has delivered to them instead of getting them out into the economy.

The World Economic Forum competitiveness table shows the United Kingdom climbing to eighth position from the 13th that it occupied under the previous Government. However, overall productivity has still not recovered fully from the decline of those years. In part, I think this is caused by the chilling effect of banks not feeling able to force the issue on their huge portfolios of exposed loans because to crystallise them would severely affect their own balance sheets, as my noble friend Lord Forsyth said. Therefore, those loans are stuck in damaged and unproductive companies instead of being directed to new, more viable growth opportunities. Lack of credit is still a huge brake on growth.

There is another serious problem that many companies face. Quantitative easing has driven down yields on gilts which company pension schemes are obliged to hold in substantial quantities. As a result, the Pension Insurance Corporation tells us that since quantitative easing began British companies have had to pump an extra £150 billion into their pension schemes, denying themselves the use of that money and, incidentally, denying the Treasury some £30 billion in lost taxes.

My noble friend spoke of the need for structural change to rebalance our economy and revive the manufacturing sector. I welcome that very much and have a suggestion to make in the field of pensions. I was glad to hear my right honourable friend the Chancellor say in the Autumn Statement that the Government are determined to ensure that defined pensions regulation does not act as a brake on investment and growth. That is a very welcome chink of light but I would like to hear what action is contemplated and when it may happen. I hope that, in winding up, my noble friend may be able to enlighten me.

While quantitative easing is one factor, and a significant one—I hope it will not be resumed—I believe that at the root of the problem was the stealth tax of 1997 that withdrew tax credits from pension schemes, estimated then at around £5 billion per annum. Just as sustained deficits lead to accumulating debt, this revenue raid has by now deprived the trustees of such schemes of some £100 billion of capital. Further imposts have resulted from the levies to the Pension Protection Fund and the introduction of more demanding projected solvency requirements in 2004. Pensions regulators have often obliged trustees against their better judgment to forgo equities in favour of bonds. This toxic cocktail was completed by the credit crunch recession, the lengthening of life expectancy and, as I have mentioned, the impact of quantitative easing on gilt yields, with all the implications for the discount factor in calculating future liabilities.

Most of the burden of meeting the funding demands has fallen on employers dealing with a legacy of departed former employees. If and when interest rates rise, part of those deficits will bounce back. However, at present, many companies, mainly SMEs in manufacturing, are being starved of working capital and the ability to invest by the overhanging shadow of inherited liabilities to their pension schemes. It is no wonder that so many defined benefit schemes have been closed to new entrants. With the dramatic decline in the manufacturing sector in past years, many firms have contracted and have often diversified into specialist sectors with smaller workforces. They have closed their pension schemes but still have the bloated burden of the past and face regulation and enforcement powers that are volatile, onerous and sometimes very damaging.

I do not have time to elaborate more fully on this problem or to list some of the possible measures needed to mitigate this blight, but blight it is. I hope that the point has registered with my noble friend, and I am sure that it has. I am sure that he is already well aware of it and of the fact that things can be done. I hope at least that he may be able to assure the House that relief is at hand.

[Lord Forsyth of Drumlean]

I am most grateful to my noble friend for giving way. I wonder whether I might tempt him on this very important point concerning how quantitative easing has artificially lowered gilt yields, which are used to calculate the liabilities, and therefore businesses are having to contribute money. Would a simple change not be to take the yields on corporate bonds as the measure instead of gilt yields?

[Lord Lang of Monkton]

My noble friend is absolutely right. That is one of the possible solutions and I hope that it is being considered. Indeed, there are others as well. This blight engulfs companies large and small, damaging—even destroying—their balance sheets. However, the SMEs that form the core and future of our manufacturing industry are the least able to cope with it. Their working capital is diverted, new investment is forgone, innovation and new technology are unaffordable, productivity suffers, credit worthiness is damaged, jobs go and companies subside.

In my past ministerial career, I have always sought to attract inward investment to this country, which is still very important indeed for the future. However, to focus effort and resources on that, while failing at the same time to bring justified and much needed succour to our home-grown existing companies, is surely most unwise. Therefore, I welcome the chink of light that the Chancellor has given us. I hope that the door will be flung open wide and the light will shine more brightly very soon. To relieve the problem would be to reawaken an engine of growth.

--- Later in debate ---

[Lord Deighton]

My Lords, I thank all noble Lords for the serial welcome. It was very kind of noble Lords to recognise the extraordinary work that went on to deliver the Olympic and Paralympic Games in the summer. That was a big team effort. In fact, many of the team are distributed around this Chamber. I appreciate all those kind words and receive them on behalf of a magnificent national effort.

I shall clear up a few housekeeping points. My name is pronounced Deighton, as in height, if you want the precedent for the English pronunciation, not as in weight. Thank you for pointing that out. There was also a suggestion that it would be useful to spend as much time as possible in the Treasury. The arrangement with my right honourable friend the Chancellor is that I should concentrate my time at the Treasury, which is why I will be supported very closely by my noble friend Lord Newby in this Chamber.

I found the debate highly stimulating. I will be able to do my job better for having listened to all the contributions. I shall leave this debate feeling hugely positive, despite the many challenges that we face with our economy. I propose to make my comments not speaker by speaker but rather consistently against the most important themes in the debate. I shall begin with a review of what I think we heard about fiscal policy—the macroeconomic policy—and I shall then review monetary policy. I shall then talk about reform of the financial sector and finally I shall talk about the selection of things that we discussed that might generally fall into supply-side reforms, including all the discussion around infrastructure and capital projects. If I do not manage to address everybody’s points, I shall certainly write afterwards. I shall also try to focus my comments on what my noble friend Lady Kramer called “doing and delivering”. I think that is what I am here to do, so my focus will be on what we can accomplish rather than on the more esoteric elements of economic theory.

I thought there was a lot that was agreed on. The way I have always operated, particularly in business, is by finding the areas of collaboration and forging ahead on them rather than labouring on the areas of disagreement. However, with respect to fiscal policy, it seemed to me that there was one fundamental disagreement between us, at least in simple theory. I think it boiled down to a very simple question. Should we inject more demand into the economy to boost growth? It is a very fair question. It is quite extraordinary to me that nearly 40 years later we are still arguing about Keynesian economics, how effective monetary policy is and the size of the multiplier. I think that was in the first week. It also convinces me that I made the right choice not to be an academic economist. The debate does not seem to have moved on in those 40 years—we are still talking about the same things—so I am glad that I went out and did something, which I was probably better at because that was not going to work.

It all sounds very easy—we should just go out and borrow more, spend it, and hey presto everything is better. That feels an awful lot like the situation we found ourselves in between 2008 and 2010 when we overborrowed and overspent when the economy was right at the peak of its performance. There has been a lot of discussion about confidence. When deficit levels are at the levels they are, I do not think you reintroduce confidence into the economy by going back on a spending spree. It just does not make any sense to me. I have listened very carefully to what everybody is describing as plan B. I do not think plan B is a plausible alternative. How does it get financed? More borrowing. How does that stack up against the bond markets and interest rates? We have saved £33 billion by being able to borrow at lower rates than had been originally projected because of our success in winning the confidence of the markets. We do not want to lose that. It is absolutely critical.

It is also not entirely clear to me that there is such an enormous difference between us. We were unable to surface just how much extra money the alternative strategy would involve borrowing and whether that would make a huge difference. I was much more persuaded by the argument, which I think matches the analysis in the independent OBR, that the principal problem with demand has been external demand, particularly the reduction in demand in the EU. The right strategy in the long term, which is part of the supply-side solution—my noble friend Lord Howell was very clear about that—is all the work being done to switch our focus in markets to the rest of the world— the so-called BRIC economies—where growth is actually occurring.

We also had a lot of discussion around the capital budget and whether it had increased since the original plans of the previous Government. I do not really want to argue about too many statistics because we have had a lot thrown both ways. Essentially the plan we have now is about £10 billion more than the previous Government’s original plan.

I accept the points made by the noble Lord, Lord Barnett, about when the money is being spent but we have to understand that capital spending and infrastructure spending are not, as the noble Lord, Lord Howell, said, a tap you turn on and off. There are long lead times. There are even longer lead times if you want to do this properly. A lot of this capital spending is not a panacea to solve a very short-term problem. In fact, thinking of it that way could create all sorts of difficulties and much more focus should be on ensuring that the projects that are mid-way through their gestation are now delivered into the economy in the right way. They are the ones that are going to have the immediate impact.

My noble friend Lord Lamont mentioned his concern about inflation. That was certainly one of the problems in 2011. The rise in commodity prices pushed our own inflation rate up, I think, above 5%. That had a significant impact on the cost of living. However, all the forecasters are looking at inflation stabilising over 2013-14 down towards the Bank of England’s target rate.

We have all referred to external agencies as supporters of our own cases. One side can produce the economists—the IMF. The other side can produce the chief executive. I could give a quote from the OECD that this is the right plan and we should stick to fiscal stability. We are all capable of producing people to support either argument. It just is not possible to bless your own strategy with the utterings of an external economist.

The noble Lord, Lord Desai, gave a very eloquent exposition of the long-term issues underlying the problems in the economy. I am not going to repeat that. I do not think that anybody particularly disagreed with much of it. However, I have a growth mentality and one of the things that attracted me to join this Government was that the Prime Minister and the Chancellor were very clear in their mandate to me. They said, “We need to deliver growth in this economy. We will support you to get that done in whichever way you can”. They convinced me that they were as committed to performance excellence as any of the other high performing organisations I have worked in. That is really what got me interested in doing this job. I was also very interested in the noble Lord’s comments on welfare. An absolutely key criterion in any of this has to be fairness. We can all argue about marginal decisions but I assure noble Lords that in my work at the Treasury the distribution effects of what we do are absolutely at the top of the criteria for assessing which measures we take.

On monetary policy, I was delighted to hear what I thought was pretty universal agreement that Mark Carney’s appointment was a good thing, if only because it speaks so highly of my right honourable friend the Chancellor’s recruiting skills. I was also a product of that although I was much cheaper.

We had a very interesting discussion about the impact of quantitative easing. Clearly, the noble Lord, Lord Eatwell, is less convinced about its current efficacy but I think we are all interested in what the new regime will have by way of new ideas. However, we should all be extremely cautious before we suggest that ditching the inflation target is the obvious alternative thing to do. That is far from clear and is certainly not the Treasury’s position. In answer to the question asked by the noble Lord, Lord Davies, I think that the Bank of England is paying 0.5% on the commercial bank reserves held by the central bank.

On banking reform—

[Lord Forsyth of Drumlean]

I am most grateful to my noble friend. Before he leaves quantitative easing, will he answer the question that a number of us raised about what happens when you unwind it?

[Lord Deighton]

I thank my noble friend for reminding me about unwinding quantitative easing. In summary, the central scenario predicted by the OBR is that it is expected to make a profit over its lifetime as the scheme is wound down but, as always with these things, that depends on a number of assumptions about the future yield curve, the exit, the pace of that exit, bank rate policy at the time and, of course, any changes to the size. However, those are the variables that go into that decision.

I think that all those who spoke about banking reform agreed that it was important to develop financing, particularly for smaller businesses, and that the Funding for Lending scheme, although in its early days, was showing every sign of being a successful scheme, so we are delighted with that introduction.

On the broader question of structural and regulatory reform, I could not agree more with the comments of a number of my noble friends that although it is absolutely critical to ensure that we have more resilience in the banking system so that the same mistakes are not made again, we have to be extraordinarily careful—I think the timing of the introduction of some of the measures reflects that—that we do not overshoot and significantly damage the banking system which exists to provide finance to the real economy. In my own mind, the real issue with many of these institutions has less to do with capital or liquidity rules and much more to do with the culture of leadership and management in those firms. We are beginning to see some promising signs of improvement there.

As regards the supply side, we have had many interesting contributions on small and medium-sized enterprises. I apologise to the noble Lord, Lord Mitchell, for the SME labelling, and note the comments of the noble Lord, Lord Birt. The United Kingdom is an extraordinarily successful incubator for small businesses. I absolutely take on board what my noble friend Lady Kramer said about thinking small. Two days ago I attended a small business forum. Everybody there was very supportive of all the initiatives that are going on. The discussion was all about implementation and taking advantage of things that are happening.

We have had a number of contributions on planning. No one ever puts forward the case that there should be more red tape, so we are all heroes in terms of our desire to cut it out and to enable faster planning permissions. As I think I mentioned in my opening speech, we have already cut 1,500 pages of planning policy and have speeded up the rate of approval of planning applications. My personal approach to this will be to follow through some of our projects to see where there are barriers and to use those as pilots for seeing where there are thematic problems that are holding up our delivery in the broader economy.

My noble friend Lord Lang referred to the defined benefit pensions issue. Rather than going through the details in my response, I will write to him separately on that. On the question of industrial strategy, I have sat in a number of meetings with my colleagues in BIS and they are absolutely focused on picking out where this country has competitive advantage and reinforcing that advantage in every way the Government can.

There has been a lot of debate on the subject of infrastructure. I want to focus on the fact that our investment in infrastructure is not about pump-priming the short-term economy. It is about modernising and improving our economy so that, over the longer term, its productive capacity is significantly enhanced. If, in the short and medium terms, that has the extremely attractive by-product of generating a significant number of jobs and short-term growth, then that is a dream package. However, that is the way around we should refer to it. There was quite a lot of discussion about roads: the ones that we have announced and have not built yet. There are a very large number of roads that we are currently building that were announced the time before: those are the lag periods. I am very interested in looking at schemes which allow us to take a longer-term perspective on creating the right investment package to support them.

The noble Lord, Lord Mitchell, was rightly concerned about broadband rollout. I have been focused on that as part of our rural broadband rollout and the urban strategy. Last month, the Chancellor announced a further £50 million to help 12 more cities deliver their ambitions for superfast broadband and I am working closely with my colleagues in DCMS and Broadband Delivery UK as well as the Economic Affairs Committee to drive delivery of that important rollout.

I see the value of smaller infrastructure projects, particularly those in local areas. This is highly consistent with implementing the reforms contained in the report by my noble friend Lord Heseltine, No Stone Unturned. For example, we have already launched 27 schemes with local authorities to help deliver that.